Mastering taxes for remote employees and companies

Management
mastering-taxes-for-remote-workers-and-companies

Today, the biggest disadvantage that remote companies and employees face is the lack of protection under domestic employment laws. More often than not, the best way to hire someone remotely is through a contracting agreement, but what does this mean when it comes to taxes?

Unfortunately, this setup makes it a little bit more difficult for remote employers and employees that are aiming to stay legally compliant. Remote employees today need to prepare to take ownership of their own bookkeeping and taxes no matter what state or country they are in.

Why remote work taxes are so tricky

With remote work taxes, you need to consider so many different things, including your location, where the company is based, and where you do most of your work. Then there is the understanding of state taxes vs federal taxes. If you work outside of the US entirely then you will have local tax laws to follow too.

It’s no wonder that remote workers can get lost trying to work it all out.

To help, let’s break down some of the key factors you need to be considering when looking at your taxes as a remote worker or company.

Workers moving around inside the US

In general, remote workers in the U.S. owe both income tax and payroll tax, so you will have to pay taxes in both the state you live in and the state you work in (or where your employer is based).

For example, if the company is based in North Carolina, but the employee lives in New York then the employer will need to register for taxes in both states.

That being said, each state has its own rules about what taxes are due, and some states have no income tax at all which means you only need to think about the federal tax. 

The current list of states with no income tax is – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Workers moving around internationally

Hiring full-time international employees comes with its own set of challenges.

U.S. companies are not allowed to hire full-time employees from overseas directly.  As such in order to hire international remote workers, a company will have to open a local branch in the necessary country.

Doing this can often be very time-consuming and costly.  For this reason, it is very common for companies to hire international remote workers as contractors instead.

This puts the tax implications on the worker rather than on the company.

A third option is to hire through an EOR, which we will cover in more detail below.

How to handle remote taxes as a remote employee

Your first step is clarifying your employment status within the company – are you an employee or a contractor? There are strict rules that determine whether a worker should be classified as an employee or a contractor, for example, a contract has the right to set their own work schedule and rates of pay. It is worth familiarizing yourself with them here.

Let’s have a quick look at the difference in how you would handle your taxes for employees and contractors:

Employees – as an employee you are not responsible for paying your taxes directly, and instead, the company will withhold your tax and pay income and payroll taxes for you. This is the case no matter where you live.

Contractor – as a contractor, however, the role is reversed, and you are responsible for handling your own taxes including calculation and payment.  You will have to register as self-employed or as a freelancer in your home country and pay the income tax (and any other work-related taxes) there.

It is not uncommon for a remote worker and a company wanting to hire or use their services to use the third option for their working relationship:

Sole Proprietorship – in this instance you, the worker, have set up your own company that you will use to invoice for the work you carry out.  This is arguably the most straightforward from the hiring company’s point of view, but in some countries, it can be difficult and costly to set up your own company.

Alternative employment through EOR

As we have said, U.S-based businesses cannot employ workers that live in other countries directly.

If, for example, your company wanted to employ a full-time worker that lived in another country you would have to open a legal branch of the company in that country.

While most of the time companies will treat international employees as independent contractors rather than opening a new branch, there is another option for U.S. companies wanting to employ overseas workers, and that is to use an EOR or an employer of record.

What is an EOR?

An EOR is a third-party company or organization that takes on the responsibility of paying employees for you, dealing with the payroll, taxes, visas, etc for their specific country. You contract the EOR company directly, rather than the employee.

This is a great way for companies within the U.S. to employ workers internationally. This means you can still control when and how long your employee works for as well as the rate of pay, without any of the headaches of trying to understand international tax law. 

The only thing you need to consider is the additional cost of the EOR.

Tax tips for remote companies

If you are an employer then there are a few things to consider when hiring remote workers most notably, how to run and control payroll. 

Identify the type of remote worker relationship

Are you hiring an employee through an EOR or setting up a local branch for the remote worker? Are you hiring them on a contractor basis? Or is the remote worker set up as a sole proprietorship? Working out which of these options to go with is your first step.

Remember, choosing which of these to go with is not necessarily about choosing the easiest or most convenient for both parties. The local laws need to be taken into account in order to determine which type of remote worker relationship will work.

Setting up payroll

When setting up payroll for your remote workers the most important thing to consider is location.  

Remember, payroll is not just about transferring money to your employees, you also need to consider and include your responsibilities for withholding, deducting, filing, and paying taxes to both federal and state bodies.

Let’s have a quick look at the considerations for paying U.S. remote workers vs international:

U.S. remote workers – the cheapest way to do this is to set payroll up yourself, and if you only have a few employees then it doesn’t need to be too arduous. 

Tip – even if you are working primarily with contractors you still have some obligations under tax laws, including having to file a 1099 form for every remote worker/contractor that you have paid over $600 to over the tax year.

If paperwork isn’t your thing, however, then there are payroll companies and apps that can do the work for you.  We have some options for payroll apps below that help make sure you are covering all bases.

International workers – the actual paying of your international workers doesn’t have to be difficult and many of the payment options for local workers, like bank wires, can be used for international workers too. These can be costly, however.

Alternatively, there are some great low-cost options for transferring funds overseas like Wise and TransferMate. Wise, in particular, also integrates well with many payroll and accounting systems which is a real bonus.

Additional tip - Exchange rates are another thing you need to consider with international workers.  Most banks offer terrible exchange rates which can cost an awful lot.  This is where using someone like Wise or TransferMate can really help keep costs low.

Payroll services and Apps

Let’s have a quick look at two of our favorite payroll services and apps that are ideal for small to medium businesses in particular:

Gusto – Gusto is a web-based all-in-one platform that handles your payroll, benefits, and HR.  It manages all of the employee deductions for you automatically like filing, direct deposits, W-2s, and 1099 forms.  It also sorts your employee’s 401(k)s, health benefits, etc too.

It is very reasonably priced too, which is why it is so popular. Its base price is $38 per month.

Zenefits – Zenefits is very similar to Gusto offering cloud-based solutions for payroll, benefits, and HR.  Their payroll process is very quick and easy and they handle all the necessary tax implications for each employee easily.

Their pricing is structured differently, and you can essentially build a package that is tailored to your company’s needs.  Their base plan is $8 per month per employee, with an additional $6 per month per employee for payroll services.

There are many options out there for handling your payroll, but in our opinion, these are two of the best solutions at the moment.

The future of remote work taxes

The global pandemic has shifted how much of the world operates and remote working feels like it has become a permanent fixture for many companies. Will this continue? It seems likely.

  •   Almost 3 in 4 CFOs have said they intend to shift at least 5% of their workforce to being permanently remote positions after-COVID19
  •  Workers wellbeing has taken a front seat with 38% of Organizations increasing remote working to accommodate a better work/life balance

This is why it is all the more important to understand the tax implications of working remotely. 

All signs point to remote working not only continuing post-pandemic but to increase further.

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